Time Warner lifts curtain on HBO growth, readies Time spinoff

The Time Warner building in New York, December 11, 2013. REUTERS/Eric Thayer

By Liana B. Baker

(Reuters) - Time Warner Inc broke out the financials for its premium movie network HBO on Wednesday for the first time, giving investors a better picture of how the unit stacks up against video streaming service Netflix Inc.

Netflix was one of the best-performing stocks last year and analysts said Time Warner wants more recognition from investors for the strength of HBO and its streaming product, HBO Go, which has a similar feel to Netflix. The effort to highlight the digital aspect of its business comes as the company prepares to spin off its slow-growth magazine publishing business Time Inc.

"Perhaps the Street should put a higher multiple on the HBO business. It's the largest potential competitor to Netflix, which is trading at such a high multiple," said Gabelli & Co analyst Brett Harriss, adding HBO's performance last year was in line with his estimates.

HBO, which said adjusted operating income rose 8 percent to $1.7 billion last year, is much more profitable than Netflix, but it has also been around much longer and is growing more slowly. Netflix posted $112.4 million in net income last year.

HBO's revenue increased 4 percent to $4.9 billion, compared with Netflix's revenue which rose 21 percent last year to $4.37 billion. Time Warner Chief Executive Jeff Bewkes said HBO recorded its biggest gain in domestic subscribers in 17 years, about 2 million last year, a figure that includes subscribers for HBO's sister channel Cinemax.

But these subscriber gains did not generate any revenue, executives said, due to some of HBO's agreements with cable operators that allow the providers to keep some of the money it makes from subscribers.

"We definitely think, and we are doing it, that we can grow the sub base," said Bewkes. "You can see the result of those investments in programming and sub growth we have had in the last couple years."

The company also said it would spin off its Time Inc publishing unit in the second quarter and put $1.3 billion in debt on its balance sheet. In contrast, when News Corp and Fox separated last year, the publishing unit was not loaded with any debt and it was given $2.6 billion in cash. Time Warner has not yet said how much cash will be on the publishing company's balance sheet.

SPINOFF

Turner, the other cable unit of Time Warner which runs networks such as CNN and TBS, said domestic advertising was flat in the quarter. Viacom Inc, which owns cable networks MTV and Comedy Central, said last week that it saw a 3 percent rise in domestic advertising revenue.

Time Warner's new finance chief, Howard Averill, projected total advertising to grow in the mid- to high single digits in the first quarter. He said ratings will continue to drag while scatter pricing, or last-minute ad rates, will be up in the high-single to low- double digits.

Revenue at its Warner Bros unit, which includes its movie studio, rose 7 percent to $4 billion in the fourth quarter.

Its performance was helped by movies "Gravity," starring Sandra Bullock and George Clooney, and "The Hobbit: The Desolation of Smaug," the second of a three-part adaption of J.R.R. Tolkien's 1937 novel. Both movies grossed more than $300 million at the global box office.

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Time Warner's net income fell to $983 million, or $1.06 per share, in the fourth quarter ended December 31, from $1.11 billion or $1.15 per share a year earlier. Excluding items, the company earned $1.17 per share.

Revenue rose to $8.56 billion. Analysts had expected earnings of $1.15 per share on revenue of $8.39 billion.

Time Warner forecast 2014 adjusted earnings per share to increase by a percentage in the low double digits from last year's figure of $3.51 per share, excluding Time Inc.

Analysts on average were expecting earnings of $4.25 per share, according to Thomson Reuters I/B/E/S. However, that forecast did not fully take into account the Time Inc spinoff.

Time Warner authorized a share repurchase program of $5 billion, compared to $4 billion a year ago and upped its dividend by 10 percent.

Shares rose 1.1 percent to close at $63.09 on the New York Stock Exchange on Wednesday.